How do I make an educated guess at the appraised value of a 6-unit?

Question

Hey friends,

I own 7 residential rental properties with 1-4 units. I'm under-contract on three more of this type. But I am also looking at my first 6-unit. I have talked to the Realtor, the owner, my contractor, my property manager and my partner. It looks promising.

But I'm not sure how much to offer as I am not sure how to make an educated guess of where the actual appraisal would come in at. I know residential appraisals are built on comparable sales. But how do you identify the value of a small apartment block that would be considered commercial (over 4 units).

Mike

Derek Carroll · Answer

Michael Wentzel with on open market deal most appraisers are going to be close to the purchase price for value. After all, the transaction price was determined by the market.

If the goal is to appraise this for higher then you'll have to provide support as to the valuation. Find comps that support the value you want and make sure the appraiser sees this.  You'll have to present a clear explaination as to why you got this below true market value. Off market? Distressed seller?  All cash offer won't much support a higher valuation, especially if the property was only on the market for a long period.

Regarding your question on how to calculate value, this size property is tough because many investors in this size still base price on a per unit basis, gross rent multiplier or other metric. It isn't until you get to larger properties that cap rate becomes the gold standard.

Don't get me wrong, cap rates are used on small properties but the rates they trade at can vary significantly. On the larger properties cap rates stay in a tighter band.

Now if you buy it today for cash and wait 3-6 months before refinancing, and in the meantime raise rents, fill vacancies,  cut expenses, or otherwise improve the Property the you should see the property appraise for higher than the purchase price.

Travis Lloyd · Answer

Appraisal vs how much to offer are two WILDLY different things.

The appraiser is going to compute valuation based on multiple models, and then settle on an amount somewhere between them all: NOI at market cap rates, price per door vs. market, and a third way (usually one of $/sq.ft. vs market, $/bedroom vs. market, or book value as computed as replacement value less depreciation plus land value).

How much you should offer? Completely different story. Remember that for the purpose of the mortgage, the appraisal needs to come in at or above the purchase price (so the bank is protected), or else they will lower their loan amount (based on LTV).

Jean Bolger · Answer

I'd suggest reading “Insider Secrets to Financing Your Real Estate Investments” and "What Every Real Estate Investor Needs to Know About Cash Flow... And 36 Other Key Financial Measures” by Frank Gallinelli. Very concise and helpful info about all aspects of a multifamily purchase.

Renae Charles Atkins · Answer

from what i have read it's

Rent roll

- all expenses

x cap rate =offer price

Derek Carroll · Answer

Michael Wentzel try to use similar size and class property if at all possible. It's not un common to go much further back in the past on commercial deals.

Also you can look to nearby cities. I'm doing a deal now where he appraiser is using comps almost 200 miles away because there are no recent trades in this small market.

Gilbert Dominguez · Answer

I would agree that unless you can do something factual about raising or improving the rents it is unlikely a bank will appraise the property at a price or value higher than you paid for it. I mean it would have to be a dramatic change.

Michael Wentzel · Answer

@Derek Carroll

Thank you for the insight. I realize this is technically "commercial", but not far off of residential. So perhaps it is caught in a strange middle ground. I realize I am not going to get a jump up from my purchase price without justification (increased rents, lower expenses, etc). It is a smaller market (100,000) people, so there are no recent sales of similar properties to compare it do. I guess I could compare price per unit to other multi-families that have sold in the area.

Mike

Michael Wentzel · Answer

@Travis Lloyd

You are right. My guess of the appraisal and what I should offer are two different numbers. But perhaps I should have explained a bit more about what we're trying to do. We are looking to buy it with cash. It should give us an advantage over other similar offers and perhaps allow us to get it at a slight discount. Then we hope to go to a bank and have them appraise it and give us a loan for 70% to 75% of the appraised value.

Let's say it is listed at $200,000. Maybe we offer $180,000 and purchase it for cash. Then if the appraisal comes in at $250,000 we would be able to get a loan to cover $187,500. That is an overly optimistic scenario, but it is a way we might be able to get into a commercial multi-family with little or no money out-of-pocket.

I have done this with residential. I am just trying to learn and see if I can do it with commercial multi-family.

Mike

Michael Wentzel · Answer

@Jean Bolger

Thank you for the book recommendation. I will add it to the list. But I probably don't have time to read it before making an offer this week.

Mike

Michael Wentzel · Answer

@Renae Charles Atkins

Thanks for the bits of information. I realize cap rate is purchase price / NOI. How do I find what cap rates are in the area? Talk to commercial brokers?

Mike

How do I make an educated guess at the appraised value of a 6-unit?

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